Improved PFI/PPP service outcomes through the integration of Alliance principles

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Abstract

This paper explores management and governance of private finance initiatives/public private partnership (PFI/PPP) projects via the integration of Alliance concepts into the typical concession agreements. In this context, appropriate governance is defined as achieving and improving long-term service outcomes. This paper presents the findings of a study that has investigated aspects of contract structure, risk management and those features of concession agreements that drive service behaviour. The study entailed industry surveys and the analysis and comparison of infrastructure projects in Australia. The findings give rise to contributions and impediments to the successful governance of PFI/PPP projects through structuring agreements to achieve improved value for money.

Introduction

Recent private finance initiative/public private partnership (PFI/PPP) projects implemented in the developed world have focussed heavily on achieving value for money (VfM) outcomes for governments through the application of robust processes. Robust processes have been articulation of clear service obligations through output style specifications (Appendix 1). Commercial benefit, public interest and community acceptance are tested through the project procurement and bidding processes and are rectified contractually with terms and conditions that clearly detail service charge regimes, risk allocation and the expectations of all concerned at the time of contracts are signed. Ongoing behaviour of the participants and incorporation of any necessary changes are managed through the administration of these contracts. This ongoing management is in its infancy and equitable. Transparent techniques of management are still being developed.

PFI/PPP contracts are long-term agreements that, by their nature, require flexibility to ensure that appropriate service outcomes are achieved over the full duration of the agreement. Changes are inevitable, yet processes for the ongoing management, governance and control related matters associated with sustaining the initial VfM objectives are still developing. In this paper, governance and control is defined as achieving and improving long-term service outcomes.

This paper outlines current PFI/PPP governance processes and details specific areas the taxpayers expect through long-term government involvement and regulation. A number of areas of debate are identified and inclusion of Alliance contracting concepts is proposed as a mechanism for future improvement. Alliance concepts are explored and tested through surveys of clients and providers of PFI/PPP projects to quantify the perceived area of weakness and potential mechanisms forward. Long-term issues with respect to risk, sustainability of the initial VfM, and facilitation of a process to manage changes have been analysed through a series of case studies investigating a number of transport projects. The focus of this analysis is to maintain and improve service outputs for PFI/PPP projects.

Section snippets

Current PFI/PPP governance approach

Current PFI/PPP processes for the evaluation and establishment of long-term outcomes are similar in jurisdiction such as the United Kingdom, Canada, The Netherlands, South Africa and Australia. The overall approach is similar to the process detailed in Fig. 1 [1], [2], [3] where a business case establishes the need for the project and a community’s interest is quantified and tested via either an implicit or explicit public interest test. The financial benefits of the project are quantified

Hypothesis

Having identified areas of governance in traditional PFI/PPP projects it is hypothesised that utilising Alliance contracting techniques, can result in improved long-term service outcomes through enhanced governance structures and hence, greater value for money.

This hypothesis is tested using a survey on industry participants from both the public and private sectors and analysis of a series of transports PFI/PPP case studies (Appendix 2). Comparison of value for money tests among numerous

Alliancing contracting for future

Alliance contracting and PFI/PPP methods seek to explicitly identify and manage risk. Conceptually both techniques approach risk differently. PFI/PPP projects seek to have proponents provide a hard money bid and take full responsibility for risks allocated to them. Alliance contracting facilitates identification of project risks and opportunities by project parties prior to establishing a target price and mechanism for both risk and reward. Details of these risk allocation differences are

Application of Alliance concepts to achieve greater value for money

Prior to Alliancing concepts being applied it is important to understand the drivers behind why a different governance structure is required. Efficient risk allocation leads to greater value for money and these concepts are further explained in the following sections.

Mechanism forward

To confirm the viability of the proposed hybrid alliance PFI/PPP structure details the process and is overarching governance controls that have been developed. The hybrid models have been developed from the principles of alliancing and these have been integrated into PFI/PPP processes. The specific risk allocation along with a specific process confirms ongoing governance integrity in alliances.

Typically in alliance contracts gain share regimes involve objective (e.g. time, cost and production

Conclusions

This paper has identified areas where enhanced value and improved long-term service outcomes may be achieved by the introduction of alliancing concepts into PFI/PPP projects. Proposed governance structures provide greater project flexibility and offer the potential to improve societal interests and to ovoid some of the weaknesses inherent in the PSC.

A hypothesis was formulated that utilising Alliance contracting techniques, can result in improved long-term service outcomes through enhanced

Acknowledgements

The authors acknowledge Multiplex Constructions (Vic) Pty Ltd and the University of Melbourne for their support to conduct and complete this research in Australia.

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      We note that there has been a paucity of studies that have examined the integration of alliances within PPI initiatives, though it has been acknowledged that service outcomes can be improved through their integration (Clifton & Duffield, 2006; Walker & Jacobsson, 2014). The integration of these concepts can provide a “flexible structure for the management of change” and a “mechanism for managing long-term outcomes while maintaining the original commercial intent” (Clifton & Duffield, 2006, p. 582). Financiers have generally been reluctant to accept the risk profile of a full alliance regime (Clifton & Duffield, 2006; Hayman, 2018).

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